The Future of Employee Engagement
Where Is the Market Headed?
Employee engagement is perhaps the most overused, misused, and misunderstood term in use by vendors, pundits, and practitioners in all of human capital management (HCM) today. At its worst, the term is a buzzword and catch-all that is almost a Rorschach test for anyone using (or misusing) it. How it’s defined says more about the speaker than the subject itself. As a result, there are plenty of people who vociferously argue that the term is hollow and meaningless.
We believe most of the confusion comes from individuals who misuse the term “employee engagement.” Employees can have varied measurable relationships with the software being used to “engage” them, and with the activities that the software encourages. Both of those are different from what we refer to as employee engagement. In most cases today, when the word “engagement” is used, it’s actually referring to one of three types of interactions:
Usage: Is the software being used? Can employees log in and complete the specific tasks that the software is meant to address? This definition is setting the bar as low as possible. It’s also the measure that too many vendors point to as an indicator of success. Example: More than 90 percent of employees have engaged with the software.
Adoption: Do employees continue using the software? Is the software adding value as a business tool? Example: More than 30 percent of employees log in to the software at least once a week.
Engagement: This is the top of mountain. Is the software actually facilitating passion and enthusiasm among employees about the work they do, inspiring loyalty for their employer, and unlocking an individual’s full potential for discretionary effort and creativity? The proper definition of engagement (which gives the term value) is capital “E” Engagement: how employees feel about their work, their workplace culture, and the organization they work for. Example: Half of employees are engaged in their work, according to last month’s employee survey.
The value of employee engagement in our minds is reinforced by one simple point: Employee engagement has become the global CEO dashboard metric for the state of the workforce. Why? Engaged employees and workforces correlate with an organization’s myriad strategic priorities: lower voluntary turnover, higher revenue per employee, and lower customer churn, to name only a few. The rise of employee engagement corresponds with a new phase of the HR technology market over the past few years, a phase that we at The Starr Conspiracy call HCM 2.0.
HCM 2.0 stands in stark contrast to the previous era. Although HCM 1.0 elevated HR from tactical record-keeping functions (the old personnel department) to a strategic business function, HCM 1.0 solutions experienced several significant limitations:
Automation rather than innovation: Most often, these solutions simply digitized decades-old paper-based processes designed to ensure legal and regulatory compliance, rather than achieve strategic business benefits.
Processes efficiency rather than transformation: The much-promised strategic value of HCM 1.0 never materialized. The primary business outcomes of HCM 1.0 were primarily tactical. Of course, HR was now on the hot seat for not delivering that strategic value.
A top-down flow of information: These solutions used command-and-control management systems, which are no longer considered best practice and are inconsistent with the working styles of the 21st century workforce.
It’s no coincidence that the signature technology of HCM 1.0 — the performance review — is being pilloried at every turn and abandoned by many major companies. Look at Adobe, for example.. After dumping “rank and yank” performance reviews, the company says it was better able to retain key talent and saw its stock price improve.
We need to acknowledge that, yes, software in HCM touches employees and can be a source of employee engagement (or, more likely, disengagement).
It’s this type of response to the perceived failure of performance management technology and processes that drives the development of HCM 2.0 solutions. Performance management is the core of the HCM 1.0 stack. In contrast, employee engagement is at the epicenter of HCM 2.0 and a new breed of solutions. Common features and functionality shared among HCM 2.0 solutions and many employee engagement solutions are:
A focus on innovation, not automation: HCM 2.0 solutions fundamentally rethink talent processes instead of simply mirroring traditional analog processes.
A flow of information that moves in all directions, not just from the top down: HCM 2.0 solutions facilitate the exchange of information from the bottom up and horizontally across the org chart, in opposition to the old “command and control” school of information flow. The priority in HCM 2.0 is on-demand access to information (pull, not push).
A design for the 21st century workforce: HCM 2.0 solutions are designed based on how work actually gets done in today’s workplace: mobile, social, collaborative, employee-centric, and focused on delivering strategic value.
Although not all HCM 2.0 solutions are in the employee engagement category, competing successfully for the employee engagement buyer today requires HCM 2.0 functionality. The reason is that many disparate categories within HR technology are battling for the attention of the employee engagement buyer: recognition, engagement measurement, wellness, next-generation learning and talent management, talent acquisition and assessments, workforce analytics, benefits, and even employee communications.
We believe that as employee engagement platforms emerge, they will incorporate some, if not all, of these solutions. Early attempts at a platform play are already emerging — Reward Gateway is an example.
2016 alone has seen an immense consolidation of companies within employee engagement. Aon Hewitt acquired Modern Survey, Virgin Pulse grabbed ShapeUp and Global Corporate Challenge, Ceridian teamed up with WorkAngel, and Reward Gateway picked up Yomp. Employee engagement has the potential to be bigger and have a greater impact than talent management ever has.
With all of this in mind, vendors, buyers, and investors need to consider …
For HCM vendors, keep hustling and keep your head on a swivel. In the traditional categories that fall into the new employee engagement category, the need to innovate and iterate at the product level will be intense, with pressure coming from inside and outside of your competitive category. Don’t assume you’re fine because you’ve got your key competitors covered. The chances of being sideswiped by a company you never even knew you were competing against are high. On the marketing side, building brand awareness will still be important. But winners and losers will be determined by functional association. For example, if you’re a recognition player, do your buyers also know you have a wellness solution? Don’t make them guess.
For HCM investors, understanding the market will only become more difficult. Part of deciding where to invest is understanding the opportunity to mitigate risk and increase upside. The reality in this category is that this market opportunity is attracting huge interest from nontraditional players. Step carefully and perform your due diligence. And realize that because of the unknowns, you will be forced to accept a higher level of risk than you would ordinarily prefer.
For HCM buyers, play the long game. You are more than likely overwhelmed by choices and confused about how to proceed. Give it time. The evolution of this market will take years to unfold. However, before focusing on the products to buy, define your talent strategy regarding employee engagement. What are you trying to achieve? How is it connected to business value? How will you get there? You need to understand these factors before signing any software contract.
The employee engagement category is squarely in the “early adopter” market stage. However, the main trio of solutions — recognition, measurement, and wellness and well-being — are all “early mainstream” to “mainstream” solutions. How is this possible? The categories of recognition, measurement, and wellness and well-being are changing rapidly. They’re moving from business models driven by services and merchandise to models driven by software and technology. This shift stimulates much of the unrest in these categories today. New players are getting traction with software-first or software-only approaches. Established players are playing catchup — and, in some cases, are being left behind.
To understand how the employee engagement market is coming together, it helps to take a snapshot of the market that’s separate from the rest of the HCM universe. Here you’ll see how the categories are starting to overlap. Let’s discuss these categories one at a time.
Employee engagement is just part of the imminent talent management metamorphosis, and next-generation talent management solutions are emerging and engaging rapidly.Learn more
The dialogue between companies and employees has become more dynamic through technology, millennials, and new perspectives on HR.Learn more
Recognition is the cradle of engagement. As a result, it will be the most essential, most confusing, and most redefined category over the next two years.Learn more
The wellness category has emerged as a 50/50 split of head vs. heart buyers. Though engagement won't change that ratio, it will change the service and tech methods.Learn more
Talent management itself is in the midst of a metamorphosis worthy of its very own brandscape. (Yes, it’s on our schedule). However, employee engagement solutions share the ultimate goal of displacing talent management solutions as foundational. The crumbling belief in performance management will create an opening. The opportunity is to create and deploy software solutions that employees actually want to use and that provide measurable, meaningful insight into employee and organizational performance. However, talent management as a category is far from dead. Here’s what to expect from the category, and a few examples of emerging players that have their eyes on engagement:
Traditional players and solutions will play defense and prepare for offense. SAP, Cornerstone OnDemand, Oracle, and the rest have far too much invested in this category to go down without a fight. For the time being, there is a healthy market in selling these solutions because they serve the needs of traditional, compliance-driven HR. However, you can be sure that work is already going on within the big players to build or acquire the pieces they need to remain competitive.
Next-generation solutions continue to emerge. There are a number of “better mousetraps” starting to emerge within the talent management category.
Performance management. Can the performance review be saved? Look no further than San Francisco-based Reflektive, a performance management-type startup with a seed round led by Andreessen Horowitz general partner (and former SuccessFactors founder) Lars Dalgaard.
Goal management. Throwing out the performance review does create the challenge of how to manage and measure goals. Palo Alto-based BetterWorks boasts a CEO who came out of the recognition space (Badgeville) and operationalizes Google’s highly regarded OKR (Objectives and Key Results) framework.
Learning. Although there are lots of next-generation learning solutions building the anti-LMS, Degreed has probably taken it the farthest. It encourages knowledge sharing, measures what’s going on, and even integrates with other LMSs.
Career pathing. Showing an employee “what’s in it for them” is a proven driver of engagement and retention. But career pathing remains a rarity in many organizations. With its U.S. base in Los Angeles, Fuel50 has built a software platform that activates career pathing and has demonstrated giant leaps in employee engagement scores among clients.
Mentorship. Professional growth is easier with a mentor. But how do you become a mentor? How do you find one? San Francisco-based Everwise has built an algorithm to answer those questions through your LinkedIn profile.
Onboarding. These solutions still tend to be included as part of talent acquisition, learning, and core HR solutions. As a result, solutions such as Parklet, a startup acquired by Greenhouse, may come on the market but will have no shortage of potential acquirers.
Leadership development. L&D remains a critical area of need for enterprise-class companies, but the best solutions still remain the province of the biggest players in the space (DDI, CEB, Korn Ferry, etc.), for now, at least.
Integration with collaboration and communication solutions becomes imperative. “Is Slack integration on the road map?” This has been an often-asked question of product leads over the past year. Why? Because employees don’t want to leave the system they work in to accomplish any HR-related tasks. We see seamless integration with non-HR work systems as perhaps the key driver of employee engagement software, and even in all of HR technology. One desktop is the goal, and no HR technology that’s serious about user adoption can ignore a holistic approach to integration with work systems for much longer.
Workforce analytics continues to morph into business analytics. Although workforce analytics (WFA) is firmly entrenched in talent management, you can expect a continued push to integrate with non-HR systems such as financials, CRM, supply chain, etc. You can also expect engagement measurement, recognition, and wellness to get in on the action quickly.
What do these changes mean for emerging employee engagement solutions?
Talent management, listen up: Other categories are coming for your pie. You can expect to see solutions across engagement measurement, recognition, and wellness to borrow heavily from talent management as natural next steps in development. How fast true competition emerges remains to be seen.
Just a few years ago, you would have been hard-pressed to find a sleepier, more moribund category than engagement measurement. For a long time, it was the exclusive domain of big consulting firms such as Gallup, Aon Hewitt, and Towers Watson (now Willis Towers Watson), as well as small internal teams at mega-enterprises. The goal was to field an annual survey, analyze the results, and produce a lengthy report that no one would really read or act upon.
Along the way, a few funny, sort-of-unrelated things happened that changed the category:
- SurveyMonkey. It became easy and cheap for anyone to produce a survey and analyze the results.
- Yelp. Suddenly, everyone was able to share their opinions. More than that, people felt compelled to share their opinions. As a result, people quickly became accustomed to short surveys.
- The emergence of “best places to work” as blood sport. Suddenly, being a so-called employer of choice became a competitive business priority.
Mix these dynamics with the rise of the millennial workforce, and add in pervasive access to smartphones, and you have the necessary dynamics to shake up a category.
The most important dynamic of this category is the concept of the pulse survey — frequent one- or two-question surveys designed to elicit either a Net Promoter Score (NPS) or answer some other question. The answers can provide real-time insight into workforce morale and open the door for coaching conversations. However, if the opposite poles for the spectrum of this category are SurveyMonkey and Gallup, there’s a lot of room for opportunity in between.
We see a bifurcation starting to occur in the category. The split is in focus. Some companies are sticking mostly to measurement. Others are using measurement as a first step toward culture activation, facilitated by the software rather than services. The highest-potential companies in the market — Glint, CultureAmp, TINYpulse/TINYhr, and Quantum Workplace — are all moving in this direction, adopting goals, feedback, recognition, robust analytics, and significant levels of benchmarking data.
What do these changes mean for emerging employee engagement solutions?
The next-generation solutions in this category will become tempting acquisition targets, because they’re moving quickly in the direction of become compelling alternatives to talent management solutions. The biggest question will be if any of these emerging players will have the opportunity to grow into major brands, or if they will all be acquired by bigger players seeking to compete in this space.
For the next two years, the recognition category will be the most essential, yet confusing, category in employee engagement. To some, it might look like the bottom is falling out. A number of legacy providers are looking for exits. Some of these exits will be disappointing. Some people will say the sky is falling. It’s not. There is, however, a tectonic division of the market underway: the separation of the software-focused companies from the rewards-focused companies.
The challengers will be the software-focused companies, the ones that have invested in their core technology and been able to monetize it. Peer-to-peer recognition technology, and the methodology around it, is at the heart of next-generation performance management solutions and the culture-activation segment of the measurement category. Among the major players are the companies best positioned to succeed with solid technology, solid business fundamentals, or a combination thereof that are trending in a positive direction: Globoforce, Achievers, O.C. Tanner, BI WORLDWIDE, Maritz, Inspirus, and Madison Performance Group.
Meanwhile, rewards-focused companies will find themselves challenged. To be clear, the rewards business remains a solid one, and there’s still money to be made. However, companies that have not invested in their technology, or that have licensed technology, will find themselves on the outside looking in during the next phase of the market.
What do these changes mean for emerging employee engagement solutions?
There are several large and well capitalized players that could become players in building the employee engagement platform of the future Achievers/Blackhawk Engagement Solutions, BI WORLDWIDE, O.C. Tanner, and Maritz. The main limiting factors for all of these companies are (1) the innate financial conservatism holding back rapid market share growth, and (2) an unwillingness or inability to fully decouple rewards from software revenue. The second factor should be the one of most concern to these market leaders. The next generation of recognition software won’t be burdened by the rewards component. That attitude should create the greatest fear in these companies.
Wellness and Well-being
As healthcare costs began to rise in the late 1990s and early 2000s, workplace wellness initiatives came on the scene with the promise of halting or at least slowing the seemingly inexorable rise of employer healthcare expenses. After 15 years, it’s safe to say that these programs haven’t helped. So is it time to scrap them? Not hardly. As Harvard Business Review pointed out recently, wellness programs are like training and development, or any other people program. Some demonstrate ROI better than others. That doesn’t mean the idea of workplace wellness has failed.
Research into the attitudes, behaviors, and beliefs of the wellness buyer shows almost a 50/50 division between those who buy wellness to control costs and expect to see concrete ROI (buying with your head) and those who buy because they feel it’s the right thing to do for their employees or because it will improve employee engagement (buying with your heart). Though we haven’t seen a significant change in the ratio of head vs. heart buyers, we have seen one significant shift among buyers in recognition and engagement measurement categories: They’re placing a high priority on adding wellness into the engagement portfolio.
As a result, just as in the recognition category, the focus on wellness is changing and turning more toward software and devices, while services-heavy programs with health coaches, claims analysis, and clinical interventions generate less market interest. We see this as part of an evolution in the market from wellness to well-being, which takes a more holistic view of what it means for an employee to be well. Good health is still a desirable goal, but so is being financially healthy, reducing stress, and improving work-life balance. As part of this shift, more buyers are going to make the control of healthcare costs secondary to improving employee engagement. And that means attending to a whole lot more in the wellness category than what it has historically meant to companies. The best example of this shift is UnitedHealth Group’s Optum wellness offering. It takes a more services-driven health management approach for members of UHC health plans, investing in Rally Heath, a tech-focused startup that focuses on engaging employees through the technology.
What do these changes mean for emerging employee engagement solutions?
The shift in the market will put intense pressure on companies vying for category leadership. They'll need to decide whether they are a services-first company (such as WebMD, Optum, Viverae, or RedBrick) or a technology-first company (Virgin Pulse, Limeade, Rally Health, and LifeDojo). Demand for services will not go away. However, we do believe that technology-driven wellness solutions that tie into engagement will be the ones that will generate buzz and awareness. Job No. 1 for these tech companies will be to construct, or connect to, recognition and measurement solutions in ways that complement rather than compete with other vendors. For some vendors, this may require a complete reimagination of the solution. There are already startups out there taking this approach. San Francisco-based Whil combines mindfulness and yoga to de-stress employees and augment leadership development.
Although currently a small category in a much larger employee engagement market, perks are beginning to gain attention as a component of driving engagement through a better employee experience. Companies such as AnyPerk and Perks.com are more on the compensation-and-benefits side of rewards.
What do these changes mean for emerging employee engagement solutions?
For bigger players in employee engagement, perks will probably still land in the “nice to have” rather than the “must have” category. As perks increase in importance, the build-or-buy question will come into play.
With the map of the employee engagement universe defined, we believe it’s important to understand where individual engagement solutions exist on the spectrum of potential vs. adoption.
Adoption Potential Matrix
We are bullish on …
Recognition. This category is foundational for employee engagement. Despite a high level of adoption, we don’t believe this category has reached its full potential. The biggest question mark on the category is how the market leaders transition from rewards-driven models to software-driven models.
Engagement measurement. This category is rapidly moving up in terms of potential, especially as it begins to borrow functionality and methodology from recognition players.
We are bearish on …
Wellness services. There are buyers who need and want these services, but we anticipate engagement-minded buyers to tie in well-being delivered through a technology platform.
Rewards. Rewards will continue to be a good business for many companies, but we believe that the future advantage goes to tech-first recognition companies.
We see high potential in …
Career pathing. The only thing that matches this category’s level of importance is the extent to which it’s underserved. Showing people how to build careers in your organization is a proven retention driver.
Peer-to-peer (P2P) recognition. We believe that P2P is no longer exclusive to the recognition category. Expect to see talent management, wellness and well-being, measurement, learning, and benefits companies leverage these technologies.
Wellness technology. Technology is the future of the wellness category. However, just as P2P is no longer exclusive to recognition, wellness technology is no longer exclusive to the wellness category. Case in point: O.C. Tanner’s Welbe offering.
Casual learning. Casual and next-generation learning technologies have a solid future in employee engagement — for knowledge sharing (Degreed), learning and communication (Fuse Universal), or gamified learning (mLevel, Bunchball).
The opportunity in employee engagement as a category is huge. The Starr Conspiracy Intelligence Unit estimates the size of the current total addressable market in employee engagement at $74.3 billion: $46.2 billion in recognition, $14.5 billion in wellness, $620 million in measurement, and $13 billion in other HCM 2.0 or next-generation talent solutions.
Employee engagement is primarily an enterprise play: $46.4 billion is the total addressable market for companies above 2,500 employees. For the midmarket (500 to 2,499 employees), the total addressable market is $10.9 billion. For small businesses (fewer than 500 employees), the total addressable market is $17.1 billion. These numbers are based on the opportunity in the United States.2 Adding in the international opportunity could double the overall numbers.
The Total Addressable Enterprise Market in the U.S. — Employee Engagement2
|Company Size||2,500 to 4,999||5,000 or more||Enterprise Total|
|Other Engagement Market||$1.047B||$6.211B||$7.258B|
|Total Employee Engagement Market for Enterprise Businesses||$6.695B||$39.709B||$46.404B|
The Total Addressable Midmarket in the U.S. — Employee Engagement2
|Company Size||500 to 749||750 to 999||1,000 to 1,499||1,500 to 1,999||2,000 to 2,499||Midmarket Total|
|Other Engagement Market||$0.485B||$0.346B||$0.630B||$0.491B||$0.386B||$2.338B|
|Total Employee Engagement Market for Midsize Businesses||$2.413B||$1.722B||$2.816B||$2.193B||$1.724B||$10.868B|
The Total Addressable Small-business Market in the U.S. — Employee Engagement2
|Company Size||1 to 19||20 to 99||100 to 499||Small Business Total|
|Other Engagement Market||$0.603B||$0.627B||$2.192B||$3.422B|
|Total Employee Engagement Market for Small Businesses||$4.755B||$4.976B||$7.342B||$17.073B|
1 Certain numbers in this report have been rounded up or down. Therefore, there may be discrepancies between the totals and the smaller component numbers, as well as between the numbers provided in the charts and text compared with the associated tables. All percentage changes were calculated using the underlying data in billions of U.S. dollars.
2 The United States market share opportunity is based on 2012 Bureau of Labor Statistics Census data. For this reason, it’s highly probable that these market size estimates represent a conservative evaluation of the employee engagement market opportunity (both within the U.S. and, consequently, on a global scale).
Evaluating market share within the recognition, wellness and well-being, and engagement measurement categories is calibrated by two principles:
- Does the company have employee software, devices, or technology as a significant part of its business?
- How much business does the company do in employee engagement or employer-based business?
For example, there are many companies in all of these spaces that don’t deploy technology or have employers as a target market. There are also many companies that make only a fraction of their revenue from their HR technology focus. Fitbit, for instance, reported $1.8 billion in earnings in 2015 SEC filings. However, it also reported that only about 10 percent of that came from its corporate wellness business. For the purposes of this report, the corporate wellness line of business is the only revenue that we considered in our evaluation of vendors.
The leader in recognition is a name that will be unfamiliar and surprising to many buyers and even to many companies in the category: Sodexo Benefits and Rewards Services (BRS), a division of the company known by many as a food services and facilities management company. Based on our research and briefings, we believe that this €20 billion Paris-based, global enterprise currently has enough market share to be the category leader.
In the second- and third-place positions are O.C. Tanner and BI WORLDWIDE, respectively. Both companies have strong financial footing and a history of profitability. But O.C. Tanner has taken great strides with its technology over the past 18 months, including developing an internal tech incubator called Tanner Labs, a collaboration with MuleSoft to deliver enterprise-wide integration; launching its own in-house wellness product (Welbe); and building on its strong foundation of thought leadership. Globoforce has taken tremendous strides with its brand and in revenue growth over the past year. However, a service outage in late 2015 gives us pause about its ability to scale. Among the rest of the category, expect the tech-first brands — brands like Achievers and Inspirus — to experience significant growth opportunities, while rewards-first brands struggle.
Wellness and Well-being
The clear leader in this category is a brand that many employee engagement buyers might be somewhat surprised to think of as a corporate wellness brand: Fitbit. The popularity of its devices somewhat obscures the fact that despite having market leadership, Fitbit’s corporate solution is pretty weak: Buy Fitbit devices and join our wellness community. In its current form, given the lack of stickiness and fickleness of technology buyers, we believe Fitbit may be the most vulnerable category leader in all of HR technology.
Virgin Pulse has consolidated a solid second-place position that is somewhat stronger than it appears at first glance, based on the inner turmoil at Healthways, the No. 3 brand. Despite a partnership with Gallup — a solid brand with a spot-on engagement message — Healthways faces widespread shareholder discontent and activism after years of wildly uneven financial results. Rounding out the top five brands are Limeade and WebMD, two brands that we think will find themselves on opposite ends of the market. Limeade’s tech focus and engagement message put it squarely in the future direction of the market. WebMD, on the other hand, remains more focused on services.
The rest of the leading brands, all with between 1 and 2 percent market share, show just how fragmented and wide open this market is. We believe that for the next few years, wild swings in market share from year to year will be the norm.
The market share breakdown for measurement is a little misleading because it looks like a mature, late-mainstream market. There’s a good reason for that. In its current approach, it is a mature, late-mainstream market. Today’s clear market leaders — Willis Towers Watson, Aon Hewitt, and Gallup — have each made lots of money measuring and consulting around annual employee engagement surveys for large enterprise clients. As demand continues to increase from smaller companies, survey vendors such as Qualtrics and Questback, will continue to flourish. But we see the biggest opportunity from next-generation players such as TINYpulse/TINYhr, CultureAmp, Quantum Workplace, and Glint. We expect market share in this category to swing wildly because of money flowing into the market, along with adjacent categories coming in to purchase players in this space.
Within the $55 billion addressable market opportunity in recognition, wellness and well-being, and measurement, we predict plenty of cannibalization, cross-pollination, and growth. For smaller market share players, 100 percent year-over-year (YOY) growth will be the minimum. For the largest competitive players, 15 to 20 percent YOY growth will be possible. Explosive growth will be the rule, with an average compound annual growth rate (CAGR) of 12 to 15 percent for all players.
We believe measurement solutions have the biggest upside. Next-generation measurement solutions will deploy recognition, 360 feedback, goal management, and career pathing tools to try to steal budget and market share from talent management and recognition budget buckets. As a result, we believe that the total addressable market for the measurement category could increase as much as 10x within three years.